What's Happening with the Dollar?
I'm always on the lookout for interesting and insightful charts, especially those that can be included in my quarterly calls to explain topics that clients are curious about or introduce less prominent ideas. The call that marked the beginning of 2026 delved into the weakness of the US dollar, a topic that has significant implications for stocks, bonds, and commodities.
The year 2025 witnessed a remarkable shift in the global economy, as international stocks finally caught up with their US counterparts. Since the financial crisis, the US had been at the forefront of the world's economic and equity markets. However, this dynamic changed dramatically last year, with the S&P 500 and even the Nasdaq 100 lagging behind while international stocks soared by over 33%. This increase was approximately twice that of the US.
The primary reason behind this phenomenon is the weakest US dollar since 2017. As the chart at the top of the page illustrates, every major currency outperformed the US dollar in 2025, even Japan.
This is no mere coincidence. It's not a matter of politics or partisanship; it's a straightforward fact: the dollar experienced a 9.2% decline. The last time it fell this much was in 2017, during the first term of the Trump presidency, which was also marked by tariffs and the alienation of trade partners.
Here's a concise explanation: US trading partners are discontent with tariffs and defense policies. We operate within a deeply interconnected global economy, and while our trading partners may not possess our level of wealth, they have alternatives. They do not support the end of post-war alliances or the 'America First' agenda, and they are responding accordingly.
The trend observed throughout 2025 was a result of a repatriation trade. Overseas investors, including private holdings, sovereign wealth funds, public funds, and other large capital pools, decided to reduce US-specific risk. They sold portions of their US holdings in dollars, converted them into their local currencies (euros, pounds, yen, Swiss francs, pesos, yuan), brought the cash back home, and then purchased local stocks and bonds.
It's challenging to imagine any other reason for every major currency to appreciate significantly against the US dollar without this repatriation trade occurring. Typically, rates and the dollar move in tandem; when we witness such decoupling, it usually indicates something unusual is afoot.
This is what happens when your trading partners and security partners are dissatisfied with your policies and choose to express their disapproval through their spending habits. (If anyone has a better explanation for what's happening, I'd love to hear it).
I'm not a catastrophist; I don't believe this signifies the end of the dollar as the global reserve currency or the end of Pax Americana. However, it is a concerning development that warrants attention. If you mistreat your trading partners, they won't simply accept it; they will respond in kind. They have repatriated a portion of their capital, and as it turns out, this repatriation has made their markets perform better than US markets.
What will cause this change? I don't foresee this administration reversing course unless the Supreme Court compels them to do so. I'm genuinely surprised they haven't done so in what appears to be an obvious case.
This is how I perceive the dollar story.
